The IRS gets in on the action and issues a new Fact Sheet concerning Payments to Independent Contractors

Last month, we wrote about the Department of Labor’s new guidance advising that an ever-increasing number of employers were misclassifying workers as independent contractors when, in the DOL’s opinion, they were truly run-of-the mill employees–entitled to the benefits and protections provided all employees not the least of which was overtime compensation. You can read that article here.

On the heels of that guidance, the IRS has issued a new Fact Sheet “remind[ing] employers to correctly determine whether workers are employees or independent contractors.” While the DOL gave us a six-part test, the IRS focuses on three factors:

1. Behavioral
“Does the business owner control or have the right to control what the worker does and how the worker does his or her job?”

2. Financial
“Are the business aspects of the worker’s job controlled by the business owner? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)?

3. Type of Relationship
“Are there written contracts or employee type benefits such as pension plan, insurance or vacation pay? Will the relationship continue and is the work performed a key aspect of the business?”

The IRS reminds us that any worker who is unclear can request a review by the IRS. The worker will complete a Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.”

If you are uncertain, it would behoove you to review this form as well, which you can access here. This form details the questions the IRS will ask. It is far more instructive than the three factors listed above.

If the IRS determines that a worker has been misclassified as an independent contractor, the employer will be assessed for back taxes and likely penalties. NOTE: If a business had a “reasonable basis” for treating the worker as an independent contractor, it is possible (not probable) they may be relieved from paying the back taxes and/or penalties. You should consult qualified tax counsel for more assistance with this specific question or see Publication 1976, Section 530.

To read the entire Fact Sheet, click here.

It seems clear the issue of “employee or independent contractor” is not going away.

By Kristen L. Brightmire, kbrightmire@dsda.com